BILL ANALYSIS C.S.H.B. 1243 By: Smithee 04-12-95 Committee Report (Substituted) BACKGROUND Currently, Texas domiciled insurers are licensed in other states to conduct the business of insurance. These Texas base insurers are primarily regulated by the state of Texas, however, they must comply with the insurance laws of the states in which they operate. Historically, there has been a large disparities in solvency laws from state to state and due to a significant number of insurance company insolvencies on a national basis, the state of Texas has develop a set of minimum solvency standards. PURPOSE As substituted, House Bill 1243 would strengthens the solvency standards that must be met by insurers operating in the State of Texas. RULEMAKING AUTHORITY It is the Committee's opinion that this bill does grant rulemaking authority to the Insurance Commissioner and the Commissioner shall adopt the rules no later than December 31, 1995 (Section 22). Section 1 amends Article 1.39, Insurance Code, Subsection (f) by requiring the Commissioner to adopt rules necessary to implement this article. Section 3 amends Article 2.20 (d), Insurance Code to permit the Commissioner to adopt rules, regulations, and guidelines that requires any company subjected to this article maintain excess of the minimums of capital and surplus levels. It is the Committee's opinion the following conditions apply when the Commissioner adopts rules. Section 4 amends Article 3.10(1), Insurance Code, to require rules adopted by the Commissioner subsequent to September 1, 1994, apply to reinsurance agreements entered into on or after the effective date of such rules, and to reinsurance agreements that are amended on or after the effective date of such rules. Section 6 amends Article 3.60, Insurance Code, to permit rules adopted by the Commissioner be imposed on risk-based capital and surplus requirements. SECTION BY SECTION ANALYSIS SECTION 1. Surplus Debentures. Amends Art. 1.39 (b) and adds new (e) and (f) to Art. 1.39, Insurance Code, to provide that the Commissioner pre-approve the form and content of surplus debentures (loans to insurers that are not initially accounted for as liabilities.) Requires 15 days notice to the Commissioner of any payment or repayment of such debentures. A grandfather provision is provided for currently existing debentures. Rule-making is conferred. SECTION 2. Deletion of Risk Based Capital Provisions. Amends Art. 2.02, Insurance Code, to delete current sections (b) and (c). SECTION 3. Risk Based Capital for Property & Casualty Insurers. Amends Article 2.20 (d) and (f), Insurance Code, to apply risk based capital requirements to certain types of property & casualty insurers. SECTION 4. Accounting for Reinsurance by Life Insurers. Amends Article 3.10 (l), Insurance Code, to strengthen currently existing rulemaking authority for accounting for reinsurance agreements. A grandfather provision is provided for currently existing reinsurance agreements. Also, would allow the offset of mutual debts and credits that may arise out of one or more reinsurance agreements entered into by life insurers. SECTION 5. Application of Certain Solvency Requirements. Amends Subchapter B, Chapter 3, Insurance Code, by adding new Art. 3.27-4 to apply current risk based capital requirements and the new "Disclosure of Material Transactions Act" to foreign or alien life insurers that enter the US through Texas "port-of-entry" statutes. SECTION 6. Impairment of Capital or Surplus for Life Insurers. Amends Art. 3.60, Insurance Code, to clarify that no impairment of a life insurer's surplus required by risk based capital rules shall be permitted. SECTION 7. Accounting for Reinsurance by Property & Casualty Insurers. Amends Article 5.75-1 (n), Insurance Code, to strengthen currently existing rulemaking authority for accounting for reinsurance agreements. SECTION 8. Title Insurers: Disclosure of Material Transactions Act. Amends Section 2, Art. 9.47, Insurance Code, to apply the new Disclosure of Material Transactions Act to title insurers. SECTION 9. Farm Mutuals. Amends Sec. 16.24 (b), Insurance Code, to delete from the list of laws that apply to Farm Mutuals certain statutes which have been previously repealed. SECTION 10. County Mutuals Amends Sec. 17.22 (a), Insurance Code, to delete from the list of laws that apply to County Mutuals certain statutes which have been previously repealed. SECTION 11. Lloyds' Insurers: Disclosure of Material Transactions Act. Amends Section 18.23(b), Insurance Code, to apply the new Disclosure of Material Transactions Act to Lloyds' insurers. SECTION 12. Reciprocal Insurers: Disclosure of Material Transactions Act. Amends Section 19.12(b), Insurance Code, to apply the new Disclosure of Material Transactions Act to reciprocal or inter-insurance exchanges. SECTION 13. HMO's: Disclosure of Material Transactions Act. Amends Section 26(i), Texas Health Maintenance Organization Act (Article 20A.26, Insurance Code), to apply the Disclosure of Material Transactions Act to HMO's. SECTION 14. Alien Property & Casualty Insurers: Disclosure of Material Transactions Act. Amends Art. 21.44, Insurance Code, to apply the Disclosure of Material Transactions Act to foreign or alien property and casualty insurers that enter the US through Texas "port-of-entry" statutes; and clarifies that current risk based capital laws apply to such insurers. SECTION 15. Dividends. Amends Section 4(c), Art. 21.49-1, Insurance Code, to redefine what constitutes an "extraordinary" dividend that requires prior commissioner approval (property & casualty insurers only.) The amendment changes the definition from one indexed to "net investment income" to "net income". SECTION 16. Disclosure of Material Transactions. Amends Subchapter E, Chapter 21, Insurance Code, to add new Art. 21.49-8 which provides that certain transactions of a substantive dollar amount must be reported to the commissioner (if not otherwise already subject to reporting.) Under the act, no additional regulatory approval authority is conferred. As defined, a material transaction entails acquisitions or dispositions of assets if the transaction is not recurring, not in the ordinary course of business and involves more than 5% of the insurer's admitted assets. Certain reinsurance transactions must also be reported if the transaction pertains to 50% of the insurer's ceded written premium, for property and casualty insurers, or 50% of the insurer's total reinsurance reserve credit, for life and accident and health insurers. SECTION 17. Property & Casualty Insurers Not to Retain Excess Risks. Amends Subchapter E, Chapter 21, Insurance Code, by adding new Art. 21.72 to codify current law prohibiting property & casualty insurers from retaining a single risk greater than 10% of the insurer's statutory net worth, unless such excess risk is reinsured in another solvent insurer. Current law (found in Chapter 6, Insurance Code) limits certain insurers from retaining a risk in excess of 10% of their capital and surplus. An Attorney General opinion has clarified that this law has a broader application to property and casualty insurers than a literal reading of the law would otherwise indicate. The standard is followed nationally; and the change would codify what the Attorney General opinion says. SECTION. 18. Stipulated Premium Insurers. Amends Sec. 22.18, Insurance Code, to delete from the list of laws that apply to Stipulated Premium Insurers a statute which has been previously repealed. SECTION 19. Non-Profit Legal Services Insurers: Disclosure of Material Transactions Act. Amends Section 23.26(b), Insurance Code, to apply the new Disclosure of Material Transactions Act to non-profit legal services insurers. SECTION 20. Insurers Providing Job Protection Insurance Amends Art. 25.05, Insurance Code, to apply the new Disclosure of Material Transaction Act to insurers providing job protection insurance. SECTION 21. Risk Based Capital Requirements. Provide for the risk based capital requirements adopted under Article 21.29, be implemented in phases over a two-year period. SECTION. 22. EFFECTIVE DATE. Provides effective date and requires the Commissioner to adopt rules as required by the Insurance Code, not later than December 31, 1995. SECTION 23. EMERGENCY CLAUSE. COMPARISON OF ORIGINAL TO SUBSTITUTE As substituted, H.B. 1243 would delete Section 4, 5, 16, 21, 25, 26, and 28(c) relating to risk based capital requirements for insurers based on the National Association of Insurance Commissioner's model act. However, the substitute does retain existing Texas law relating to risk based capital. The substitute adds clarifying language under Section 4 to require rules adopted by the Commissioner define requirements for risk transfer in reinsurance contracts and apply only to new agreements or to those agreements which are modified after the effective date of the rules. In addition, Section 6 of the substitute amends Article 3.60, Insurance Code relating to impairment of surplus capital with respect to falling below statutory minimums requirements. SUMMARY OF COMMITTEE ACTION In accordance with House Rules, H.B. 1243 was heard in a public hearing on February 22, 1995. There being a quorum present, the Chair laid out H.B. 1243 and recognized Representative Averitt who offered a substitute to H. B. 1243. The substitute to H.B. 1243 was not adopted. The Chair recognized Woody Pogue with Texas Department of Insurance as a resource witness to testify neutrally on H.B. 1243. The Chair recognized the following persons to testify in support of H.B. 1243: Fred Bosse, USAA; Ross Davidson, USAA. The Chair recognized the following persons to testify in opposition of H.B. 1243: Will Davis, Texas Legal Reserve Officials Association; John Abdnor, Bankers Commercial Title Insurance Company; Carl Parker, Insurance Alliance of America; Bernie Burner, Texas County Mutual Association; Robert P. Clines, Provident American Insurance Company; Garland M. Lasater, Transport Life Insurance Company; David Harris, Central United Life Insurance Company; Mark France, Directors Investment Group; Brian Davis, Directors Investment Group; James L. Young, Statesman National Life Insurance Company; Lawrence Barnett, Christian Fidelity Life Insurance Company; Joe T. Bailey, representing himself; David Barnett, Christian Fidelity Life Insurance Company; Steven Camp, S.J. Camp & Company; Larry E. Kosta, Colonial Casualty Insurance. The Chair referred H.B. 1243 to a subcommittee to be named at a later date. On April 12, 1995, there being a quorum present, H.B. 1243 was heard in a public hearing. Since H.B. 1243 was authored by Representative Smithee, Representative Smithee turned over the chair\gavel to Representative Duncan. Chairman Smithee had previously referred H.B. 1243 to a subcommittee on February 22, 1995. The Chair (Duncan) recalls H.B. 1243 from subcommittee without objection. The Chair laid out H.B. 1243 and a substitute to H.B. 1243 and recognized Representative Smithee who explained the difference between the substitute to H.B. 1243 and the filed bill. The Chair recognized Representative Dutton who offered Committee amendment #1 to the substitute to H.B. 1243. Representative Dutton removed Committee amendment #1 from consideration. The Chair recognized Representative Smithee who offered Committee amendment #2 to the substitute to H.B. 1243 and moved the Committee adopt Committee Amendment #2. The Chair heard no objections and Committee amendment #2 was adopted. The Chair recognized Representative Smithee who offered Committee amendment #3 to the substitute to H.B. 1243 and moved the Committee adopt Committee Amendment #3. The Chair heard no objections and Committee amendment #3 was adopted. The Chair recognized Representative Averitt who moved the Committee redraft the substitute to H.B. 1243 incorporating the all adopted amendments into a complete and new substitute to H.B. 1243. The Chair heard no objections and the motion was adopted. The Chair recognized Representative Averitt who moved the Committee report the redrafted substitute to H.B. 1243 to the full House with the recommendation that it do pass and be printed. Representative Driver seconded the motion and the motion prevailed by the following vote: AYES (9); NAYS (0); ABSENT (0); PNV (0).